Despite being the second-largest economy in Africa and the largest in North Africa, Egypt is currently adversely impacted by a severe shortage of US dollars, resulting in one of the most challenging economic situations the country has faced in decades.
A wave of devaluations
The shortage of US dollars has undermined Egypt’s efforts to address the imbalances in its economy and the recovery actions taken to overcome the repercussions of the Russia-Ukraine war. For instance, in an effort to counter the surging inflation and its impact on the purchasing power of the people, which has decreased by over threefold since March 2022, Egypt’s government raised salaries for state employees four times in two years, incurring a total budget impact of approximately EGP 16.5 billion. Despite these increases, purchasing power continues to decline due to the weakness of the local currency.
Since the start of the European conflict in March 2022, Egypt has devalued its local currency three times against the US dollar, causing the Egyptian pound to lose over 75% of its value against the greenback. This marks the weakest performance of the Egyptian pound in almost 30 years.”
“The devaluations have sent prices soaring, particularly those of imported goods, leading to a substantial cost-of-living crisis for the country’s 104 million citizens. Last year witnessed dramatic increases in input costs for Egyptian businesses due to soaring energy prices and worsening global supply chain disruptions following the outbreak of the war in Ukraine,” stated the International Banker.
The attempt to attract investors through the devaluation of the Egyptian pound has also faced significant challenges. Presently, the US dollar is trading at close to EGP31/1 USD in the official market in Egypt while reaching over EGP45/1 USD in the parallel market.
“Over the past few years, deteriorating economic conditions and increasing depreciation pressures in developing countries have led to an upsurge in active parallel currency markets. Currently, approximately 24 emerging and developing economies (EMDEs) have such active markets. In at least 14 of them, the exchange rate premium—differences between the official and parallel rates—is a significant concern, exceeding 10% [in some cases],” said Former President of the World Bank, David Malpass.
This considerable gap creates hesitation among investors, impacting decisions to invest or expand within the market. For instance, Bloomberg reported in earlier this month that Egypt’s shortage of US dollars impacted profits for one of America’s largest crop handlers, “Andersons Inc.,” leading to a drop in third-quarter earnings due in part to a currency shortage in the world’s largest wheat importer.
The Egyptian market anticipates a fourth wave of currency devaluation, a crucial requirement stipulated in the country’s latest $3 billion IMF loan deal approved in December 2022. This expectation, coupled with the absence of proper market supervision, has prompted merchants to hike the prices of local commodities, leading to varying prices for the same commodity across different stores.
Further, the lack of adequate market oversight has led to monopolies, primarily in highly consumed commodities, such as food products and beverages, significantly contributing to the escalating prices. Additionally, the lack of local alternatives to boycotted goods from Israel, a reaction to the humanitarian crisis in Gaza, and rising costs for businesses due to increasing prices of raw materials, other inputs, and shipping costs have further compounded the situation.
Knocking on the IMF door
A range of factors have contributed to the noticeable shortage of US dollars in the Egyptian market. The most notable of them is an exodus of approximately $25 billion in hot money from the market aimed to benefit from the high interest rates in other markets, notably the US market.
Securing an IMF loan to address the shortage of dollars entails additional strain on Egypt’s budget. To bridge the estimated $17 billion financing gap during the IMF program, Egypt plans to secure loans from various International Financial Institutions (IFIs) like the World Bank, the African Development Bank, the People’s Bank of China, with the intention to sell state-owned assets through its IPO programme. Moreover, Egypt aims for a rollover of Gulf Cooperation Council (GCC) deposits at the Central Bank of Egypt (CBE). The country is also pursuing an additional $1 billion loan from the IMF through its Resilience and Sustainability Trust.
But Egypt’s previous engagements with the IMF since 2016 have heavily burdened its citizens. IMF conditions have necessitated phasing out fuel subsidies and increasing various taxes to increase state revenues. Under the most recent agreement, Egypt discontinued low-interest initiatives introduced by the Central Bank of Egypt for industries, agriculture, real estate, and tourism, thereby depriving citizens of soft, low-interest loans.
Meanwhile, the Egyptian government has implemented several other measures to address the shortage of US dollars. These initiatives aim to generate $191 billion by 2026, primarily from Suez Canal revenues, maritime services, exports, tourism, remittances from Egyptian expats, and the IT sector’s outsourcing services. Additionally, the country has expanded its issuance of sovereign bonds, targeting the Asian market.
Moreover, the country has introduced various benefits for its citizens living abroad. These include initiatives such as the zero-customs imported cars programme, providing loans in US dollars at favourable interest rates, and offering loans for real estate purchases. Nevertheless, it remains unclear whether and when these measures will have the expected impact on the country’s economy.
In what appears to be a decisive reaction to the deteriorating situation, President Abdel Fattah El-Sisi declared a halt to further actions like depreciating the local currency or introducing additional interest rate hikes due to escalating inflation. This means a temporary pause in fulfilling the country’s IMF commitments, perhaps a temporary respite for the average citizen, at least until the conclusion of Egypt’s upcoming presidential elections scheduled for 10-12 December 2023, where El-Sisi remains the favourite candidate.